Outlook

Property prices to head lower in 2019 as market absorbs the impact of 2018 government tightening measures.

We expect homebuyers and sellers to be locked in a “stalemate” given the uncertainty brought about by government measures, especially from the increase in average home sizes come 2019. Replacement demand for homes from en-bloc buyers will tail off from 2Q19 as most buyers would have already bought a replacement home by then.

As such, we see 2019 as an inflexion point for the residential market as demand for homes are projected to be reeled in post government tightening measures in 2018. We forecast primary property transaction volumes to decline by 20% y-o-y to 7,500-8,500 units in 2019, supported by demand from home formation. Property prices (measured by the property price index [PPI]) after increasing by close to c.9% in 2018, is projected to decline by up to 3.0% if volumes weaken further.

Sales momentum already showing signs of weakening.

Post the measures in July 2018, property developers have turned more cautious in their launch strategy and have opted to launch a smaller number of units during launch. Project sell-through rates for new launches which averaged 50-60% prior to July 2018, have declined to < 40%, implying that developers will take a longer time to complete selling.

We do not rule out price cuts yet but only in the medium term if sales momentum fails to pick up towards the 5-year ABSD deadline.

Residential supply pipeline still high.

With a pipeline of close to 30,000 units (estimated from remaining units to be launched from existing projects and unlaunched projects in the pipeline, the slowing sales momentum will mean a built-up in unsold supply of units going forward. Based on the estimated primary sales transaction volumes of 7,500-8,500 units for 2019, this will mean an absorption rate (total unsold supply/total primary sales) of 3.5-4.0x, which historically coincide with property price weakness.

While the residential market is expected to weaken, we project most property sub-sectors in Singapore to remain on a cyclical upturn, largely driven by an improvement in demand-supply dynamics, giving landlords the upper hand in rental negotiations going into 2019.

We continue to see a recovery in rents in the office and industrial (warehouse and business park) and the hotel sub-sectors as supply risks drop off significantly. The retail sub-sector is also seeing abating supply risk as pre-commitments for new supply entering the markets remain high.

Risks

With global interest rates expected to be on an uptrend in 2019- 2020, a key uncertainty will be the pace of increase negatively impacting homebuyers’ affordability as mortgage burden rises. In addition, with the Singapore economy expected to slow on a y-o-y basis, this could impact sentiment and investments in the physical market.

Further government policies to be introduced if property prices rise at an unabated pace.

The recent hawkish stance by the government on the pace of property price increase will remain an overhang for this sector. While we see no further policy tightening after two measures imposed in 2018, if property prices continue to rise, we do not rule out further tightening to be introduced in 2019 to further curb demand for homes. Some of these measures could be

a further hike in both buyer and seller stamp duties, or

an increase in supply in the government land sales programme.

Valuation and Stock Picks

A range-bound trade in 2019 with valuations a catalyst.

Given the surprise policy measures, property developers' share prices have taken a hit and have remained weak since July 2018. The sector now trades at a P/NAV of 0.75x or a P/RNAV of 0.65x. Looking at the historical trading P/NAV band in the past downcycle over 2013- 2017, developers trade at an average of 1.0x P/NAV with -1 standard deviation (SD) of 0.80x and trough at 0.67x.

While there is value at current valuations at close to -1SD, we believe that given the infusion of uncertainty in the physical market conditions, coupled with a more dampened sentiment among developers, share prices are likely to remain range bound.

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